Read a paper and chances are there’s a story concerning the cost of oil that is moving one way or in the opposite direction. If you’re a typical buyer one can believe that there’s one market worldwide for this essential resource of energy, however there isn’t a single market for oil and the standard of crude oil differs across the globe, based the location from which it comes. Therefore, there various classifications of crude oil which serves as a unique economic benchmark for the oil.

The Differences in Crude Oil

There are a variety of crude oil–the solid, non-processed liquid extracted by drillers under the ground. There are different types of crude oil, and some are preferred over other types. In particular, it’s simpler refiners can make diesel and gasoline using low-sulfur as well as “sweet” crude in comparison to crude with higher sulfur levels. Low-density, also known as “light” crude is generally preferable to high-density because of the same reasons.

The source of the oil is also a factor when you’re buying. The cheaper it costs to transport the product and the less expensive it will be to the buyer. From the perspective of transport the oil produced by sea offers certain benefits in comparison to land-based sources and are dependent on pipeline capacity.

In light of this the buyers of crude oil, along with the speculators need a simple method to determine the value of the commodity by its grade and where it is located. benchmarks like Brent, WTI, and Dubai are a good way to actually achieve this. If refiners buy an Brent contract they are able to have an notion of what the quality of the oil will be as well as what source it comes from. The majority of world’s trading occurs in the market for futures which is linked to a specific category in oil.

Due to the dynamic nature of demand and supply the price of each benchmark fluctuates. In the longer term the same benchmark that was could be sold for a higher price than an alternative index could suddenly be accessible at a lower price.

The Main Benchmarks

There are numerous benchmarks for oil with each being a crude oil benchmark that comes from a specific region of the world. But, the prices for the vast majority are tied to one of the three main benchmarks:

Brent Crude

A majority of crude contracts across the world refer to Brent’s crude and it is the most frequently used mark among all. Today, “Brent” actually refers to five oil fields of the North Sea: Brent, Forties, Oseberg, Ekofisk Oseberg, Ekofisk, Forties, and Troll. The crude from these regions is also sweet and light in weight and is ideal to refine gasoline, diesel and other highly-demanded products. Since the source is water-based, it’s simple for transport to remote places.

West Texas Intermediate (WTI)

WTI is the term used to describe oil extracted from wells within the U.S. and sent via pipelines through pipelines to Cushing, Oklahoma. Being located on land is one of the main disadvantages of West Texas crude because it is costly to transport to specific areas of the world. The oil itself is soft and sweet and is ideal for refining gasoline, specifically. WTI is still the primary standard for the oil used throughout the United States.

Dubai

The Middle Eastern crude is a valuable reference point for oil that is lower quality as compared to WTI as well as Brent. It is a “basket” product consisting of crude from Dubai, Oman, and Upper Zakum, it’s somewhat heavier, and contains a higher sulfur content placing it in the “sour” category. Dubai benchmark Dubai reference is considered to be the principal benchmark in the field of Persian Gulf oil delivered to the Asian market

Brent is the standard for 80percent of global oil trade as well as WTI being the most popular benchmark within the U.S. and Dubai influential on Dubai in Asian markets.

Importance of the Derivatives Market

Crude Futures

It was the case where buyers would purchase oil at the spot market. That is, they’d pay for the price at hand and receive the delivery in a couple of weeks. But, following the crisis in oil that occurred in the early 1970s, refiners and buyers for government agencies began to look to reduce the chance of abrupt price hikes.

The answer came via crude oil futures that are linked to a particular base crude. Futures allow buyers to ensure the price of an item for a period of time or even years prior to the date of purchase. In the event that the price of the commodity being used as a reference rises substantially, buyers are more secure with a contract for futures. Most futures can be settled in cash. However, some contracts provide for physically delivery of the product.

Crude Options

As well as the choice of futures, investors can be a part of derivatives that are tied to a specific crude benchmark. The derivatives can also be a great option to benefit reduce the risk of price fluctuations. If the price of a particular crude marker increase and the owner of the put feature has the ability, though not the obligation — to buy an amount of barrels at a set cost.

Speculative Trading

But, not all options and futures linked to crude benchmarks can be used to hedge. Speculators also play a major role in the marketplace who believe that fluctuations in supply or demand will cause the cost of specific crude commodities higher or lower.

Investors may also bet on the course of the gap, or spread among two different benchmarks. Investors typically look into the fundamentals of the specific source of oil and determine if the difference between the two benchmarks will grow or narrow. Similar to traditional options for oil, they are also known as “spread options” are available through major exchanges.

It is common for trading to be intense in the event that one of the two benchmarks experience extraordinary fluctuations. As an example, NYMEX WTI-Brent spread options that are traded on CME Globex experienced record trading volumes from 2011 until 2013 following an increase of U.S. crude sent WTI prices into a tailspin compared the Brent benchmark. Brent.

What Is Made From Crude Oil?

The various products that are made of crude oil include kerosene petroleum, diesel Jet fuel, gasoline, liquid petroleum gaz (LPG) and heavy fuel petroleum, petrochemical feedstocks as well as solvents and lubricants.

What Is the Difference Between Brent and WTI?

The distinction in Brent as well as WTI crude oil lies in where they are sourced from and the composition. Brent crude originates out of northwestern Europe in the North Sea and WTI comes from the U.S., primarily Texas, North Dakota, and Louisiana. In addition the sulfur material differs, which decides which is sweeter in comparison to one. WTI contains less sulfur than Brent which makes it more sweet and therefore simpler to refine.

Is Saudi Oil Brent or WTI?

The oil that comes from Saudi Arabia is neither Brent or WTI. It is based on the benchmark Dubai/Oman for pricing its oil, however its reserves do not come directly from the fields of Dubai/Oman.

The Bottom Line

The crude market is remarkably varied, with the grade and the origins of the oil causing an enormous impact on the cost. Due to their stability the majority of crude oil price worldwide is based on benchmarks like the Brent, WTI, or Dubai benchmarks.